VentureBeat

With oil past $120 a barrel and possibly headed to $200, cellulosic ethanol companies are looking like a smarter investment choice every day. Following the increase of Range Fuels’ second funding to $166 million, its competitor Mascoma has pulled the wraps off an $81 million funding of its own, with $10 million coming a major oil and gas producer, Marathon Oil Corporation.

Range, Mascoma, Coskata and others are all racing to raise huge amounts in an attempt to bring the world’s first full-scale cellulosic plant online. The stakes are high: If the process proves to be cheap enough, investors will be eager to pour money into new plants. On the other hand, waiting to see if competitors fail won’t be particularly helpful — each company has its own proprietary process.

Mascoma will begin production this year at a demonstration plant in Rome, New York, but is also planning facilities in Michigan and Tennessee. By comparison, its two largest competitors will build a single, big plant each, a bet that could presumably result in a more spectacular success, or failure.

Backing each company is a network of high-profile investors, some of whom overlap. General Motors has investments in both Coskata and Mascoma. Morgan Stanley is with Range Fuels, which also counts Khosla Ventures as an investor — and Khosla has invested in Mascoma, as well. Taking venture fundings and government grants together, Range Fuels is the most heavily funded, Mascoma coming second with just over $200 million now, and Coskata third.

It’s possibility none of the three emerge with a competitively priced product — something that also hinges on whether oil prices continue to climb, or fall back to somewhat saner levels. If all three find their methods too expensive, there is still a constellation of smaller cellulosic startups waiting for their own turn in the spotlight, like Zeachem.

Other investors in the round included Khosla, Flagship Ventures, Atlas Ventures, General Catalyst Partners, Kleiner Perkins Caufield & Byers, Pinnacle Ventures and Vantage Point Venture Partners. Out of the total amount, $20 million was venture debt provided by Pinnacle.

Terry Tamminen is the former top environmental advisor of California governor Arnold Schwarzenegger, and is also former secretary of the California Environmental Protection Agency (EPA). He has a reputation for having “turned Arnie green”.

Tamminen left his post as permanent advisor in 2006 but says he still advises Schwarzenegger as well as the governors of Florida, Maryland and, Minnesota, on the renewal of environmental legislation. Tamminen also has a role in venture capital: He sits on the advisory board of San Bruno-based venture capital firm Vantage Point Venture Partners. He is also an operating advisor for Connecticut-based private equity fund Pegasus Capital Advisors.

I talked with Tamminen at his office in Santa Monica about some hot topics in making California greener.

VB: The plan to build a high-speed train to Northern California has given rise to a lot of pro- and con opinions, as we’ve covered. What do you think about the plan?

TT: It’s a great idea. I’m not sure if it’s a best use of public money, though. The first line is said to cost about $40-50 billion. If you take that amount of money and divide it between some big cities that need mass transit, like Los Angeles, San Diego and San Bernadino, you’ll probably do much better in getting people to use mass transit. The government could encourage the high-speed train with smaller investments and help private investors by giving some land and speeding up the permitting process.

VB: What are the best ways for the government to support using solar power and other renewables?

TT: Californian renewable standards have to be federalized. According to our renewable portfolio standard, 20 percent of the energy in California has to come from renewables by 2010, and 30 percent by 2020. If we had that at the national level, it would spur all kinds of renewables. Then the investors would know that there will be a demand for the product, whether it’s wind or solar power, or something else. Some financial incentives wouldn’t hurt either, because we have been subsidizing fossil fuels for so long.

VB: California is considered the leading state on environmental issues in the US, but there has been criticism that the reforms to make the state greener are not proceeding as quickly as they should. What do you think?

TT: The evidence is very much that we are the leading state. The average American uses 12,000 kWh electricity per person per year, while the average Californian uses 6,700. The policies take some time to become successful. In 2006, when the governor signed the global warming solutions act, we were at that point the first state to have that kind of legislation. Today, there are 28 states that have plans and seven that have put them into law like we have. Several more will do so this year, so by the time the new president takes office in January 2009, the majority of the US population will live in a state that is doing what it would do if it was a separate state under the Kyoto accord, and that’s largely due to the Californian leadership.

VB: Will California reach its goals to cut greenhouse gas emissions by 20 percent by 2010?

TT: We will be a little late, by maybe a year. That’s better than anybody else in the US. Edison’s territory in Southern California is about 16 percent; they’re going to be the closest. Northern California is at about 10 percent. There has been an effort, but one problem is, we don’t have the transmission lines. For example, we have a number of solar thermal projects in the desert, but we don’t have the the transmission lines to get the energy into the city where it’s needed. Rooftop wind and solar plants would solve part of the problem because they don’t need transmission lines. The most important thing to reach the goal is energy efficiency. Even if you have solar and wind power and hydrogen vehicles that emit nothing, it takes time to get those things into the marketplace. Energy efficiency takes place immediately and reduces greenhouse gases.

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Mascoma, a start-up that is trying to become the first commercial developer of cellulosic ethanol — something some environmentalists see as the Shangri La of alternative fuel — will announce tomorrow it has raised $30 million more in venture funding.

Funding for the Cambridge, Mass. company was led by General Catalyst Partners, and included Kleiner Perkins Caufield & Byers, Vantage Point Venture Partners, Atlas Venture, and Pinnacle Ventures. Existing investors Khosla Ventures and Flagship Ventures participated.

Khsola Ventures’ Vinod Khosla and Kleiner’s John Doerr between them spent millions to support the Calif. Prop. 87 “oil tax,” which would have funded alternative energy research. It was defeated last week, so this funding suggests they remain undeterred.

Currently, ethanol is made from corn, and is relatively expensive to produce, and remains more expensive than gasoline. But scientists say ethanol can be made much more cheaply by breaking down and converting cellulosic material (grass, wood, agricultural and forestry wastes) into ethanol. Several efforts have experimented with cellulosic production but none have become commercial ventures yet — and experts say it will be a couple of years yet before cellulosic production is ready for primetime. Once ready, it may be blended with, or even displace gasoline entirely.